Last week Peter Diamond, the Nobel-prize-winning economist who had been nominated for a post on the Federal Reserve's Board of Governors, withdrew the nomination. For months, it had been held up by Sen. Richard Shelby for no particular reason other than that it gave the Senator from Alabama pleasure to do so.
The withdrawal occasioned some chin-scratching about the broken nomination process. Of course, shenanigans always go on with nominations; the Senate never moves as quickly on them as an administration would like. But from the outset, the Republican minority in the Senate has tried to deny President Obama the ability to govern and implement policy. To that end, they've made a practice of sitting on, slow-walking, blocking and filibustering nominations.
Democratic partisans are disappointed that Obama doesn't get agitated and make obstructionists pay a price. But the president bears plenty of responsibility. While you can blame the other party for not cooperating, the ultimate failure to fill key posts in important agencies is its own goal, an unforced error, a self-inflicted wound. You can't have nomination fights if you don't nominate people in the first place. The Senate has confirmed a lower percentage of nominees for judgeships than it has for prior presidents. But Obama has also attempted to fill a smaller percentage of openings than his predecessors. It doesn't always require an act of obstruction to keep a government post open.
That's certainly the case at the Fed. Clinton administration veteran Brad Delong says, "The failure to fully populate the Board of Governors of the Federal Reserve is Obama's biggest unforced error." I'd add some others: letting the health care debate drag on ad infinitum, not pushing for a larger stimulus, and naming Alan Simpson to co-chair the Simpson-Bowles Commission. But as Aaron Task and I discuss in the accompanying video, the blasé attitude toward vital economic appointments is turning into one of the great mysteries of the Obama presidency.
Presidents have every incentive to hit the ground running. You only have the reins of government for so long, and political honeymoons are notoriously brief. During the long eight years of the Bush presidency, Democrats had plenty of time to think about who might make a good judge or Fed governor. Democrats tend to have deep policy benches and no shortage of people eager to serve.
It's vital to fill every position, from the most obscure ambassadorship to the top White House post. But given the political and macroeconomic circumstances, appointments to the Federal Reserve are really, really important. The economy hasn't been growing rapidly enough to create a sufficient number of jobs. Congress is not going to deliver anything resembling stimulus over the next two years. In fact, it's doing the opposite. House Republicans are heightening uncertainty by refusing to approve an increase in the debt ceiling (even though the Ryan budget they passed would require the creation of trillions of dollars of new debt), and both parties are pushing for large spending cuts.
For an economy hampered by slack demand and high unemployment, the Fed is the only game in town. As currently configured, it's not much of a game. The central bank has the dual mandate of fighting inflation and promoting full employment. It has done a good job on the former and a poor job at the latter. When the banks were melting down, the Fed couldn't do enough to save them. But as it faces an extended period of demoralizing above-trend unemployment, the Fed responds with a collective shrug. Bernanke and his colleagues make pro forma comments about the scourge of high unemployment, but spend much more time worried about (nonexistent) inflation. My brief summary of Bernanke's speech Tuesday on the U.S. economic outlook: Things are slow. Inflation is low. Unemployment is high. Don't expect us to do anything about it.
President Obama, and the nation's millions of long-term unemployed, need a Fed that at least thinks about what it could do to increase employment, even at the risk of slightly higher inflation. Three percent inflation won't make Obama a one-term president. Nine percent unemployment could.
A president can't micro-manage the Federal Reserve. But he can influence it by appointing the people who run it -- the chairman and his colleagues on the seven-person Board of Governors. But Obama hasn't taken full advantage of the opportunity to put his own stamp on the Fed. He reappointed Bernanke, a Bush appointee, to a second term as chairman in February 2010. More than a year ago, he nominated three people to fill two vacancies that existed and the third that would open when Vice Chairman Donald Kohn retired in the summer of 2010. (The governors make banking regulatory policy and sit on the 12-person Federal Open Market Committee, which sets interest rate policy.) The confirmation process for Peter Diamond, Janet Yellen and Sarah Raskin dragged on, and Kohn ultimately left in September, leaving three vacancies on the seven-person board. On October 4, Yellen and Raskin were sworn in, bringing the roster of governors up to six. But Bush appointee Kevin Warsh vacated his seat at the end of March. With Diamond's withdrawal, there are now two unfilled spots on the Board of Governors. The FOMC has only 10 members, instead of its usual 12.
Meanwhile, as Jesse Eisinger noted in The New York Times, the same blase attitude has left a void in leadership at the agencies charged with implementing financial reform and regulating other parts of the financial system. The FDIC will soon be leaderless. Elizabeth Warren, the head of the new Consumer Financial Protection Agency, serves in an acting capacity because the Senate won't confirm her. And so on.
Filling those slots won't make the bailouts popular, or magically reflate the labor market. The Fed can still make policy short-handed. But leaving positions unfilled means the generally conservative and high-unemployment-tolerating voices on the Fed will continue to dominate. And agency heads that don't have the security of confirmation are less likely to act decisively. All of which means that, as it heads into an election that is likely to be fought on economic grounds, Obama isn't going in with maximum troop strength.
In 1992, the Clinton mantra was "It's the economy, stupid." Obama's 2012 slogan should be "It's the economic policymakers, stupid."
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His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.